Will Prime Minister Manmohan Singh be able to bring the animal spirit back into the economy?

The PM asked and the country delivered. On June 26, the previous finance minister resigned and the next day the Prime Minister took charge. Almost as soon as the shift happened, a statement from the PM was released which sought to set a new agenda for the economy.

He identified the investment climate as the major challenge facing the country and made some soothing sounds regarding the hostile taxation environment that the Union Budget had brought in.

No doubt, things have been helped along quite substantially by equally happy talk in Europe, but the fact remains that in a most unexpected manner, the dour mood among investors and businessmen has lifted to a remarkable degree.

Even the rupee has lifted itself from the depths and shot up by over 5% in these days. What's more, a couple of globally well-known business names - IKEA and Coca Cola - have come up with announcements about investments that they intend to make in India.

Almost on cue, the stock markets zoomed up. In the 10 days that have followed, the Sensex is up more than 600 points. Most equity MFs are up 6-8%; and after a long time, investors think that they have some premise for expecting to make money from equity investments once more.

This climate of cheer is especially helped by the fact that unlike the previous cycle in 2008 and 2009, there has been no broad downturn in equities this time. Through the entire phase of severe negative news cycle resulting from the so-called 'policy paralysis', equities have managed to keep their head above the water. As a result, portfolio values are very quickly on the verge of reaching levels where investors have actually started feeling happy.

Unfortunately, taking a balanced view of the positives and the negatives suggests that there's a serious danger of the optimism running ahead of itself. At the end of the day, not a great deal has changed except that a high level of expectation has been created from Manmohan Singh's reign as finance minister.

On the positive side, the biggest tangible is the sharp reduction in global oil prices, something that can have a positive impact on the twin deficits that the economy is facing. Low oil prices create a window for the government everywhere, including on the political front. It means that the limited political capital that the government has does not have to be expended on excessively large fuel price hikes.

However, if you are looking for tangible good news, that just about completes the list. Look at the laundry list of the urgent items that must be on top of the PM's to-do list. Speeding up infrastructure creation. Coal supply issues. Environmental roadblocks. Spectrum policy. Aviation FDI. Retail FDI. The new insurance bill. The land acquisition mess.

The state of the electricity boards (whose losses are effectively a huge subsidy bill that is not counted as such). And so on and so forth. In theory, all these should be of concern only to businesses that operate in or want to enter these sectors. However, for corporate India, looming above all this are the high interest rates and tight liquidity. And that's two factors that cut across everything else.

On the subject of tangible versus intangibles, the PM was unerring in his identification of the most important intangible, which is this whole business of animal spirits. It's worthwhile reading the context in which John Maynard Keynes first used the term in the current sense. ... the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations ... our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

Don't start the celebrations till you see evidence of the 'spontaneous urge to action' all around you, like you used to till half a decade ago.